Tim Bovee, Private Trader: LYB: A tale of redemption

Update 9/9/2015: I've exited my position in LYB for a small loss. i got out because my position was too low for covered calls, and I didn't want to commit sufficient funds to bring the position up to the full 100 shares.

Shares declined by 36.1% over 408 days, or a -32% annual rate. The shares, a hedge and dividends produced a -2.0% loss on debit, for a -2% annual rate.

Update 12/1/2014: I was unable to structure a new hedge on LYB because of unfavorable open interest distribution and a resulting overly high risk/reward ratio. I'll keep working on the problem and, with luck, eventually succeed.

Update 11/22/2014: My LYB bear hedge expired out-of-the-money on Nov. 22 for maximum (100%) yield on debit. I'll put off calculating yield or loss until the LYB series is complete.

LYB shares remain below the 12-month moving average, and I shall attempt to roll forward into a new position on Monday, Nov. 24.

Update 10/13/2014: LYB has completed wave 3 and has moved into a wave 4 counter-trend correction, closing below the 55-day price channel. I've opened a bearish hedge on my bull position to mitigate the losses.

Implied volatility stands at its high-point for the year, so I've structured the hedge as a bear call spread, short the $97.50 calls and long the $100 calls, sold for a credit and expiring Nov. 21. There is a likelihood, in my opinion, that implied volatility will fall after earnings are announced on Oct. 24. The position has 4.5:1 leverage and the short calls have an 80% chance of expiring out of the money.

Update 7/28/2014: LYB continued to rise until two hours before the closing bell, hitting a high of $109.91. That was sufficient momentum for me to open a bull position under my longer-term rules, structured as long shares.

LyondellBasell Industries NV (LYB) is proof that sometimes Chapter 11 bankruptcy can be the best thing that ever happened to a company. It forces reform, it erases past mistakes and it gives the company a new birth.

So it is with LyondellBasell Industries, and its chart since the company emerged from Chapter 11 tells a tale of corporate redemption.

The Chart

LYB has a short history, having begun trading under its present symbol only since emerging from Chapter 11 bankruptcy in April 2010.

After hitting a low a few months later in July 2010, it joined the rest of the market in launching itself into an uptrend that has so far multiplied the price nearly 10-fold.

Click on chart to enlarge.

LYB 5 years weekly bars

The most recent leg up began in June 2012 from $35.97. The price hit a higher high today of $108.79.

The most straightforward Elliott wave analysis puts LYB in a series of third waves, the highest degree, {+2}, having begun in 2010 and the smallest, {-1}, having begun in April 2013 from 458.20.

An interpolated count from the S&P 500 for the period prior to LYB's resumption of trading in 2010 would put LYB in third waves at the {+3} and {+4} degrees, as well.

That's a lot of potential upside momentum.

Odds and Yields

LYB has completed eight bull signals since wave 3 {+1} began in June 2012. Six were successful, on avferage yielding 8.7% over 61 days. The two unsuccessful signals lost 3.6% over 17 days, on average.

The win/lose yield spread is a quite respectable 5.1%.

The Company

LyondellBasell Industries is a global chemical company based in Houston, Texas, with manufacturing operations at 58 sites in 18 countries. It maintains a European headquarters in Rotterdam, The Netherlands, and an Asian headquarters in Hong Kong.

Analysts are positive about LyondellBasell's prospects, collectively coming down with a 43% enthusiasm rating.

The company reports return on equity of 32%, with debt at 57% of equity.

The earnings yield is 6.39%, compared to a 2.49% yield on 10-year U.S. Treasury notes. The company pays a dividend yielding 2.58% annualized at today's prices.

Growth estimates and the dividend imply a "fair" price of $96.75, suggesting that the stock is overpriced by 12.34%. I've marked the growth-implied price on the chart in purple.

Earnings have been zig-zagging higher for the past three years. They've surprised to the downside five times in that period, most recently in the 1st quarter of the current year. The other quarters have all produced upside surprises.

The stock is selling for 16 times earnings, and also at a small premium to sales. It takes $1.27 in shares to control a dollar in sales.

LyondellBasell next publishes earnings on Feb. 4, 2015. I've been unable to find an ex-dividend date but it will be either soon or in October. The last quarterly payouts was 70 cents per share.

Liquidity and Volatility

LYB on average trades 2.5 million shares per day and supports a wide selection of optoin strike prices spaced $2.50 and $5 apart, with open interest running to three and four figures.

The front-month at-the-money bid/ask spread on calls is 11.1%, compared to 0.6% for the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 19%, compared to 13% for the S&P 500, and has been zig-zagging downward since peaking at 30% in October 2013. It is up from its lowest low of the year, 17%, attained last May.

The volatility level is at the 18th percentile of its one-year range, suggesting that the most successful options strategy would be long vertical spreads bought with a debit.

Options are pricing in confidence that 68.25 of trades will fall between$102.87 and $115.01 over the next month, for a potential gain or loss of 5.6%, and between $106.02 and $111.86 over the next week.

I've marked the month range on the chart in blue.

Contracts today are skewed heavily toward calls, which are running at 4-1/2 times their five-day average volume. Calls are running at 48% below their average volume.

Decision for My Account

I like LYB as a potential bull play, mainly because of its Elliott wave placement in a series of third waves. That gives the price room to run further to the upside.

The 11% bid/ask spread on options is a bit wider than I like. I prefer spreads in the single digits. I do very much like the dividend yield in excess of 2.5%.

The best way to avoid the wide bid/ask spread and take advantage of the dividend is to open a bull position under my longer-term rules, wherein I buy shares and hold them for a year, hedging with options during downturns as it becomes necessary.

Using my longer-term rules, I intend to buy shares in the half hour prior to the closing bell, if LYB continues to show upward momentum. If it falters, then I'll add it to Watchlist for later consideration.

-- Tim Bovee, Portland, Oregon, July 28, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.